ARTICLE (May 07 2010): I was shocked and truly saddened to read reviews of the proposed amendments in the draft SECP Act from various national dailies. The hard work and progress that has been achieved by SECP over the last 13 years seems to be coming to naught by certain elements for their own vested interests it seems.
The people at the helm of affairs at the SECP and its Policy Board are inadvertently playing into their hands. Having spent three precious and most productive years of my life at the institution I could not help but examine the press reports and am raising my voice against what I believe to be official murder of the SECP.
I therefore got myself a copy of the draft 2010 SECP Act, which was an exercise in itself. The draft law is steeped in secrecy and cloak and dagger, so much so that apparently the law department of the Commission headed by a Commissioner has not been provided with a copy. I have reviewed the draft Act and tried to understand why the Commission and the Policy Board are so intent on going the wrong way down a one way street. My review does not leave me a happy man.
Review of the 1997 SECP Act started back in 2005 when Dr Tariq Hassan was Chairman SECP. A lot of hard labour has been put in since then to try and bring it in line with other similar progressive Commissions around the world. The objective was to instill best practices from other parts of the world while keeping in view the peculiar circumstances that prevail in Pakistan and our stage of development.
In 2008, after a lot of deliberation, the Commission approved a draft SECP Act and presented it to the Policy Board for comments prior to presenting the same to the Ministry of Finance. Unfortunately, a misconceived controversy with SBP took us off course and the draft law got derailed. It was then reviewed in 2009 and the latest draft doing the rounds was revealed in 2010.
In my review I have taken advantage of the background thinking and rationale used to draft the 2008 version of the law together with the three years hands-on experience that I had in the Commission to try and determine what should or should not be included in the new SECP Act. The draft Act impacts the following major areas and I would recommend the GoP to immediately review the proposed recommendations for further development of the SECP and capital markets in Pakistan.
AUTONOMY AND INDEPENDENCE OF SECP The draft 2010 SECP Act in my opinion effectively downgrades SECP into a department of GoP and in particular the Ministry of Finance. We seem to be going back in history and trying to re establish the CLA. Incidentally, creation of an independent SECP has always been a conditionality of ADB and World Bank loans for the GoP.
Currently it is one of the conditions imposed by the ADB prior to disbursing a US $400.0 million loan. How can the Policy Board and the Chairman SECP compromise on this very important institution building measure? Without independence and autonomy I am afraid the SECP will not be worth retaining as an institution and would be a monumental waste of time.
The SECP will be subject to unwarranted political and bureaucratic pressures which will be almost impossible to withstand and will consequently affect the performance of its duties and functions namely enforcing laws fairly, fiercely and independently.
Interestingly, clauses within the proposed draft SECP Act on one hand are still professing high sounding principles of autonomy and independence of the Commission and on the other hand the same ideals are being systematically eroded away.
For example, Section 3(3) states "In performance of its functions and duties under this Act, the Commission shall be an independent and autonomous body and no person or entity shall seek to influence the Chairman, Commissioners and its officers or interfere in the working or activities of the Commission."
POWERS OF THE POLICY BOARD These have been enhanced beyond recognition at the cost of the Commission. The Policy Board which consists of five ex-officio members including three federal secretaries, is now proposed to be given executive powers as well as oversight of the Commission's regulatory functions. Furthermore, Chairman SECP is now required to report on quarterly basis to the Policy Board on executive functions.
It has been given the powers to approve regulations made by the Commission on functional and regulatory issues. Commissioners will be appointed by GoP on the advice of the Board. All these new powers coupled with the powers to approve the Commission's budget, employment policy, HR policy, investment policy etc will turn the Policy Board into a super executive board that has the potential to suffocate the Commission and its working.
In my view, the Board should not oversee the performance of the Commission as it is not a performance evaluating Board, nor is it an executive Board. After granting these powers where is the independence and autonomy of the Commission and the Chairman? What happened to the high sounding goals enumerated in Sec 3 (3) above?
Furthermore, majority of the Policy board members should be sourced from the private sector with the ex officio members being restricted to four. The Chairman of SECP Policy board should be appointed by the Federal Government from amongst the non-ex-officio members. Ideally, the Chairman should be the Chairman of the Commission and I would seriously plead this case. A lot of issues will be resolved where the Chairman is made Chairman of Policy Board by law.
SECURITY OF TENURE FOR CHAIRMAN AND COMMISSIONERS Security of tenure is now proposed to be removed by the Government without due process and reasoning. This move alone will obliterate any possibility that the Chairmen and Commissioners will in future act independently and without submitting to undue pressures.
The Commissioners and Chairmen will be beholden to the Policy Board members for their jobs, perks and privileges and cannot be independent. In addition, they will now have a carrot dangling in front of them that they may be reappointed for as many terms as they want till they reach 62 years of age so long as they remain good boys and toe the party line.
In my view, there is a dire need to appoint honest, dedicated, technically well qualified and proficient individuals as Commissioners and Policy Board members who have the stature and are capable of withstanding pressures not just from the government but also from the private sector. The law should provide that all Commissioners should be from the private sector or home grown within the SECP.
That any person with direct or indirect interests in the capital market or associated directly or indirectly as shareholder or partner with a regulatee of the Commission should not be appointed as Commissioner or Chairman. Similarly, there should be a one year bar on senior management of SECP, including the Chairman and the Commissioners, from joining a regulatee after leaving their employment with the SECP.
Security of tenure must be guaranteed to the Commissioners and the Chairman and they should be debarred from being appointed in the Commission as an advisor or consultant or in any other capacity after completion of two terms as Commissioner.
POWERS OF THE CHAIRMAN The draft SECP Act proposes to give the Chairman SECP wide powers which tramples on the Commission in no uncertain terms. The Commission has in effect been made subservient to the Chairman. The Chairman is proposed to be vested with the powers to manage the administration and operation of the Commission including procurement of goods and services, entering into contractual commitments and obligations and appointing staff and agents.
Sec 8-4-c: Furthermore, he has also been given the powers to take enforcement action, including instructing any regulated person to take remedial actions, or appoint a receiver or impose penalties sec 8-4-d. The Chairman is also being given the powers to delegate any of his powers or functions to whom he likes sec 8-4-e.
To top it all, in sec 8-4 g he is being given carte blanche powers on issues and matters that are not specifically mentioned in the proposed Act. Total powers, no less. The Commission effectively becomes redundant, the Commissioners downgraded to lackeys and we have on our hands the potential for a one man dictatorial show.
In addition to the sweeping powers proposed to be given to the Chairman, he is also being provided with emergency powers similar to those of Governor SBP. However, it is worth noting that SBP is not a Commission and hence blindly importing clauses from the SBP Act may not work for the SECP. SBP regulates the monetary policy of the country in addition to the payment systems and the entire banking sector.
Emergencies do arise at the SBP which need to be tackled almost instantaneously. SBP does not have an in-house collegiate body to seek views and counsel and hence may need to provide emergency powers to the Governor. No emergency of the nature that SBP may face is envisaged in SECP. Even if an emergency does arise that warrants an immediate decision it is worth remembering that an emergent Commission meeting can be called within 5 minutes, in which the issue will be debated and a collective decision taken in the best interests of the Commission and the country. Consequently, giving the Chairman sweeping powers, albeit in an emergency, is principally wrong as it goes against the concept of a collegiate body.
ENFORCEMENT POWERS OF SECP The independent tribunal proposed by the Commission to hear appeals and try criminal offences has also been done away with by the Policy Board in the latest draft Act. It may come as a surprise to many but it was during my tenure as Chairman that SECP for the first time filed criminal cases against high profile companies and individuals for market manipulation and insider trading and other fraudulent activities.
Individuals and companies transgressing the law knew that they have an even chance of getting caught and will be penalised as provided in the law without any favours. However, these cases which were filed in the ordinary criminal courts have not made any progress even after nearly three years. Simple criminal cases filed by the Commission take nearly a decade to decide.
In such circumstances, the Commission in 2008, under my chairmanship, had proposed that special tribunals be formed which shall have the expertise, time and single mindedness to try such serious offences. These Tribunals exist in many countries, including India, with satisfactory results. In my view these Tribunals should have been set up decades ago.
The failure to apprehend and try offenders who commit fraud on ordinary investors of the country not only seriously affects the Commission's reputation as a regulator, but also erodes the investor confidence in the market and in the country.
PLEA BARGAINING OR 'LENIENCY' Plea bargaining or Leniency as the draft Act likes to call it, is practised in developed economies of the world and in principle is a useful provision. It takes on a life of its own in our environment where the judicial process is time consuming and cases drag on for years.
While I am supportive of this new provision I have some reservations. Strangely enough the power to accept the plea bargain offer has been given to the Appellate Bench of the Commission on the recommendation of the Commission. It does not make sense that the Commission consisting of all Commissioners should refer a matter for approval to the Appellate Bench which consists of two of the same Commissioners.
'VOLUNTARY RETURN' While I support voluntary confession of crime and the need for SECP to show some leniency as it certainly has merit given our judicial system, however, it is recommended that these not be applicable in cases concerning fraud and malpractice to the detriment of the investor and the general public.
In such cases SECP should prosecute the errant regulatee with full force and vigour. Fraudulent activities once caught cannot be allowed to get away scot-free as proposed in the draft Act. If the Commission approves and accepts the offer the accused should stand convicted of the offence and should cease to hold public office and stand disqualified for a period of 3 years from holding any public office or that of a director or officer of a company.
DISBURSEMENT OF FINES The power to apply any fine collected by the Commission towards payment to an informant or for other purposes as stipulated in the draft Act should only lie with the Commission. This is a very important power and should not be delegated to any individual member of the Commission as it is prone to misuse and may give rise to potential corruption and misappropriation.
MISCELLANEOUS SAFEGUARDS AND FACILITATIONS REQUIRED In my experience, the SECP should have the power to call for information directly from banks and financial institutions with respect to payment, so that identity of a payer or payee is tracked expeditiously. This information is invariable required to bring to fruition any properly conducted and duly authorised investigation.
No successful investigation into financial crimes can be completed and prosecution closed without effectively understanding and laying bare the money trail. It is proposed that prior to a Chairman or Commissioner or Executive Director taking up appointment in the Commission he should not only disclose his interests but should also sell all securities held in a regulatee and settle all outstanding loans to any regulatee.
In conclusion, I would impress upon all concerned at the SECP, the Policy Board and the Government of Pakistan to please review the proposed amendments in light of the concerns raised herein above. It is imperative that the collegiate nature of the Commission be retained, the autonomy of the Commission remains preserved and the independence of the Commissioners and Chairman zealously safe guarded. Without independence of the Commission justice and fair play shall be sacrificed and the poor investor and the public at large shall be the main sufferers.
(The writer is former Chairman of SECP)
Source: http://www.brecorder.com/index.php?id=1053370&currPageNo=1&query=&search=&term=&supDate=
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